Best Interest Rates: How to Get Them

To get the best possible interest rate on a car loan, it's important to understand two things: the current marketplace for interest rates, including different lender options and financing offers, and your personal financial situation and its possible limitations. Though credit became "tight" after the subprime-mortgage meltdown, as lenders swung from indiscriminate to overly conservative practices, car dealers say that misperception — more than a true financing shortage — has kept shoppers out of their stores. The situation has improved, especially as domestic manufacturers have ratcheted up incentive offers.

Several primary factors determine your interest rate:

Your lender. Unless you borrow money privately, you're going to be working with a bank, a credit union or an automaker's financing arm. There are various pros and cons to each scenario.

The car you're buying. Are you buying a new car? A used car? A very used car? New-car rates are often the lowest.

Loan-term length. When automakers introduced zero-percent financing to keep cars selling after the 9/11 terrorist attacks, they were only offered on two- and three-year loans. Now many automakers are offering zero-percent financing on five-year loans. In general, though, longer loans come with higher interest rates.

Your credit rating. Borrowers with better credit get lower rates. Jack Gillis, public affairs director for the Consumer Federation of America, estimates that only 15 percent of car buyers qualify for zero-percent offers from automakers.

Lenders

Car buyers borrow money from three primary lending sources: banks, credit unions and automakers. Loans from any of these sources may come through the dealer, who often serves as the middleman and takes a cut in the process.

Getting a loan through a car dealer is not, however, automatically more expensive. In fact, dealers provide the only way to get specialized low rates, including zero-percent financing, from automakers.

Car dealers borrow money at wholesale interest rates, which they then mark up and pass on to you. Because the dealer's rate is lower, the rate you get may be no higher than one you arranged yourself. Still, the only way to make sure of this is to know what your best rate is before you get to the dealership.

New or Used?

In general, new-car loan rates are better than used-car rates. Usually, only new cars qualify for zero-percent financing, though some automakers occasionally push certified pre-owned stock with zero-percent offers. In general, the older the car is, the higher the interest rate is.

Term Length

Sign up for the shortest term length you can afford to take advantage of low rates.

Sign up for the shortest term length you can afford to keep your total interest lower; the longer term you have for a car loan, the more you'll pay in interest.

The average term for a new-car loan is more than 60 months now, and this leaves consumers vulnerable to owing more on a loan than their car is worth, a condition that's often referred to as being upside down or under water.

What to Do if Rejected for a Loan

If at first you don't succeed, don't try, try again until you've determined why you were rejected and have taken steps to address it. Credit scores are the primary determinant of who gets approved for loans, and if you didn't check your credit score before you applied the first time, it behooves you to do so before applying again. Many loan applications automatically trigger a credit check, each of which can knock a few more points off your credit score, making what might have been a bad situation even worse.

If your credit score is accurate and you've taken all possible steps to improve it, you're ready to do what we recommend for all car buyers: Shop around for a good interest rate before returning to a dealership. Credit unions are a great option; while they're perceived as exclusive, their interest rates are typically lower than many banks and they're more likely to examine a subprime applicant's circumstances and make exceptions if problematic credit history results from one-time medical expenses, unemployment or divorce.

Don't overlook the bank where you have a savings or checking account. Your financial history won't be a mystery to any potential lender, but an existing relationship can work in your favor, as it's easier for a bank to sell services to its customers than it is to find new customers.

Finally, don't rule out financing a car at the dealership. Only a dealer can offer new-car finance rates from the automaker; those rates are sometimes the lowest available. Also, if you've taken our advice but had little success with other loan sources, a dealership might be more willing to make financing accommodations if you're buying one of its cars, especially a used one. If the dealership that denied you the first time was smaller, a larger one might have more tolerance for risk or have good relationships with more lenders.